漢瑞祥 (HSIC) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein fourth-quarter conference call.

(Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's call, Carolynne Borders, Henry Schein's Vice President of Investor Relations.

Please go ahead, Carolynne.

Thank you, Natalya, and thanks to each of you for joining us to discuss Henry Schein's results for the fourth quarter of 2014.

With me this morning are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein, and Steven Paladino, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to state that certain comments made during this call will include information that is forward looking.

As you know, risks and uncertainties involved in the Company's business may affect the matters referred to in forward-looking statements.

As a result, the Company's performance may differ from those expressed in or indicated by such forward-looking statements.

These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission.

In addition, all comments about the markets we serve, including growth rates and market share, are based upon the Company's internal analyses and estimates.

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 11, 2015.

Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.

I ask that during the Q&A portion you limit yourself to a single question and a follow-up before returning to the queue.

This will provide the opportunity for as many listeners as possible to ask a question within the one hour we have allotted for the call.

With that said, I would like to turn the call over to Stanley Bergman.

Good morning, everyone.

Thank you, Carolynne, and thank you for joining us.

We closed our 2014 year with strong fourth-quarter financial results that once again included market-share gains in each of our business groups.

The global markets we serve remain generally healthy, highlighted by, of course, continued strong patient traffic in North America, and we are particularly pleased with the solid internal sales growth in local currencies in our international businesses, too.

We achieved adjusted EPS growth for the year of 10% and are affirming our guidance range for 2015 diluted EPS.

I am also pleased to mention that in 2014, for the first time, Henry Schein exceeded the $10 billion sales mark on an annual basis.

In a moment, I will provide some additional commentary on our performance, along with a review of some of our key accomplishments during 2014.

Needless to say, we completed our three-year strategic plan for the period 2012 to 2014 and did very well from our point of view on, of course, planning and executing on that plan.

We feel that our business units are in good shape.

We have a great management team in each of our business units and at the corporate level and are well positioned for a good 2015 and beyond.

Before I give you further comments and highlights on the Company, per se, Steven will review our quarterly financial results.

Steven?

Okay, thank you, Stan, and good morning to all.

I am also pleased to report strong results for the fourth quarter of 2014, as well as the full year.

If you look at our Q4 results, our net sales for the quarter ended December 27, 2014, were $2.7 billion, reflecting a 7.0% increase compared with the fourth quarter of 2013.

This consisted of 9.9% growth in local currencies and 2.9% decline related to foreign-currency exchange.

In local currencies, internally generated sales increased 4.9% and acquisition growth contributed an additional 5.0%.

You can see additional details of our sales growth in Exhibit A of our earnings news release that was issued this morning.

Our operating margin for the fourth quarter was 7.5% and expanded by 11 basis points compared with the fourth quarter of last year, and even if you exclude the impact of acquisitions completed during the past 12 months, our margin also expanded by 6 basis points compared with last year's fourth quarter.

Our effective tax rate for the quarter was 29.7% and this compares with 29.8% in the fourth quarter of 2013.

The slightly lower tax rate is due to implementation of ongoing tax planning strategies, as well as higher earnings in countries with lower corporate income tax rates.

Going forward for 2015, we believe our effective tax rate will continue at a similar rate and be in the 30% range.

Our net income attributable to Henry Schein for the fourth quarter of 2014 was $133 million or $1.56 per diluted share.

This represents growth of 7.0% and 9.1%, respectively, compared with the fourth quarter of 2013.

I think it's important to note that foreign-currency exchange had a negative impact of approximately $0.04 on the current quarter's EPS for the quarter, so $0.04 negative impact is included in our numbers.

Looking to the results for the full year, there are a number of highlights.

Sales increased 8.5%, exceeding $10 billion for the first time, as Stan just mentioned.

Our cash flow was very strong at $593 million and exceeded net income by over $126 million.

Diluted EPS increased almost 10%, at 9.9%, to $5.44 and that's -- the increase is after adjusting non-GAAP items in the prior year, and we believe overall 2014 was an excellent year from a financial perspective.

You can see a reconciliation of GAAP and non-GAAP income and EPS in Exhibit B of our news release.

If you look at some additional detail on our sales results for the quarter, dental sales for the quarter -- for the fourth quarter of 2014 increased 3.9% to $1.4 billion.

This 3.9% growth consisted of 7.5% growth in local currencies and a 3.6% decline related to foreign-currency exchange.

In local currencies, internally generated sales increased 2.3% and acquisition growth contributed an additional 5.2%, primarily related to the acquisitions of BioHorizons and Arseus.

If we look at the 2.3% internal growth in local currencies, the components are 1.9% in the North American market and 2.9% in the international market.

If we look at the components within each of North America and international, the 1.9% internal growth in constant currencies in North America included very strong growth in dental consumable merchandise of 4.9% and a decline in dental equipment sales and service revenue of 4.7%.

We believe that the equipment sales declined in North America substantially due to this late reinstatement of tax incentives for the US market in 2004 (sic).

These tax incentives were reduced to $25,000 at the end of 2013 and were not returned to the previous level of $500,000 until December 19 of 2014, and we believe it was really too late for our customers really to take advantage of that increased benefit in the fourth quarter to impact sales growth.

If you look at the 2.9% growth in the international market, we had 3.1% growth in consumable merchandise and 2.6% growth in equipment sales and service revenue.

Turning to animal health, our sales were $731.6 million in the quarter, an increase of 12.3%, which included growth in local currencies of 15.9%, offset by a decline, again, in foreign currency of 3.6%.

The internal sales in local currencies grew 7.8%, while acquisitions contributed an additional 8.1%.

That 7.8% internal growth in constant currencies included 6.9% growth in North America and 8.6% growth in our international animal health sales.

If you normalize our North American animal health sales for the impact of certain products that switch from agency sales to standard sales, North American internal sales growth was a little bit less, at 5.9%.

Turning to medical, our medical sales were $461.7 million for the quarter, an increase of 9.4%.

That 9.4% consisted of local currency growth of 9.9%, offset by foreign-exchange currency declines of 0.5%.

The internal sales in local currencies was 9.4% and 0.5% related to acquisitions.

That 9.4% growth consisted of 9.5% slightly higher in North America and that was led by upmarket and midmarket customers and growth also strong in international of 8.4%.

During the quarter, we sold seasonal influenza vaccines at the rate of $26 million for the quarter, and that's up slightly from the $23.8 million in last year's quarter.

I will also point out that our fourth-quarter results include about 1.5 months of agency revenue, resulting from the strategic agreement with Cardinal Health, and Stanley will discuss a little bit more details on this agreement later on in the call.

We remain confident that our strategy of focusing on large group practices and IDNs resulted in continued market-share gains.

Technology and value-added service sales were $91.3 million in the quarter, an increase of 3.3%, and that includes 4.4% growth in local currencies, offset by 1.1% decline related to foreign-currency exchange.

In local currencies, the internally generated sales growth was 1.5% and acquisition growth was an additional 2.9%.

That 1.5% growth was a slight decline in North America of 0.7% and 15% growth international.

But remember, in the North American market we also have a shift in sales from standard sales to agency sales, and if you adjust for that and normalize for that, our internal growth in local currencies was 6% and included 4.6% growth in North America.

This will be the last quarter for this normalizing adjustment in technology since that shift has now annualized.

We continued to repurchase common stock in the open market during the quarter.

Specifically, we repurchased 595,000 shares at an average price of $124 per share, approximately $74 million.

The impact of these repurchases in the fourth quarter was not material to our EPS.

Looking forward, we still have $300 million available for 2015 repurchases, and for 2014, we did achieve our stated goal of repurchasing about $300 million for the year.

If you look at our balance sheet and cash flow, we had strong operating cash flow for the quarter, $274 million, which is substantially the same as the $274.6 million last year.

Our operating cash flow for the year was $592.5 million and free cash flow was $510.4 million.

Again, we are pleased that we exceeded our goals related to cash flow and free cash flow for the year.

Looking at accounts receivable days outstanding, really not much change there.

We improved a little bit from 40 days last year to 39.9 days, and inventory turns were pretty much consistent at 5.9 turns this year versus 6.2 turns last year.

Let me conclude my remarks by affirming our 2015 financial guidance as follows.

For 2015, we expect adjusted diluted EPS attributable to Henry Schein to be in the range of $5.90 to $6.00.

That represents growth of 8% to 10% compared to our 2014 actual results.

The US dollar, as I think everyone knows, has strengthened, and assuming it stays at its current level, we would expect adjusted EPS to be toward the lower end of the range for the year.

Keep in mind that approximately 35% of our sales are based in currencies other than the US dollar and primarily the euro is our largest currency, and we do not hedge against the translation exposure for foreign exchange.

I think it's also important to point out that we expect adjusted EPS growth to accelerate during the year.

This is typical for us as we typically make investments at the beginning of the year that will pay off later in the year, and this acceleration reflects continued leveraging of our infrastructure and controlling of expenses, as well as realizing efficiencies from recently acquired acquisitions.

The 2015 guidance excludes restructuring costs related to a planned corporate initiative to rationalize some of the Company's operations and provide significant expense efficiencies.

We believe it's important to reduce our cost structure so we can invest further in new initiatives to drive future long-term growth.

This initiative is expected to continue throughout 2015 and the costs are estimated at between $35 million and $40 million pretax or $0.29 to $0.33 per diluted share.

As always, our guidance is for continuing operations, as well as completed or previously announced acquisitions, but does not include the impact of any future acquisitions.

Let me now turn the call back to Stan.

Thank you very much, Steven.

Let's begin a discussion on our four business groups with dental.

In North America, internal consumable merchandise sales growth in local currencies remained strong at nearly 5%.

Equipment sales and service revenue, as Steven noted, declined in North America due to the issues surrounding the timing of tax incentives in 2014 that Steve mentioned.

We, of course, had a lot of purchases in the fourth quarter of 2013 that were driven by the large amount of accelerated depreciation that was available to customers, and, of course, advising customers on December 19 that that was now available for a window of 10 days or so was just not practical to have -- and had no real impact.

Our international dental growth was solid for both consumable and merchandise -- consumable merchandise for the equipment side, with internal growth bolstered by strategic acquisitions made earlier in the year, especially on the dental equipment side.

In early January, we announced that during the year's second quarter we will be expanding our dental equipment product offering in North America by adding the entire line of A-dec equipment.

Our commitment to our dental customers has always been to provide the widest possible selection of products, equipment, and value-added services to create customized solutions that meet our customers' needs.

Products from A-dec, along with those from other valued equipment supplier partners, further this commitment by providing greater access to the broadest range of dental equipment from industry leaders.

Let me just confirm that we will only be adding the A-dec line around the middle of the second quarter.

We also recently announced the acquisition of ADS Florida, which is one of the largest dental practice transition and brokerage companies serving the state of Florida.

Although this transaction represents only a few million dollars in revenue, it is very important strategically for several reasons.

It expands the geographic reach of our Practice Transitions offering to dental practice owners looking to buy or sell their practices and builds upon last year's acquisition of the Maddox Practice Group in California.

This transaction also adds to our Practice Transitions footprint, a large market where the dental industry is flourishing, and incorporates ADS into the Professional Practice Transitions group of Henry Schein Financial Services.

Our goal is not only to provide national coverage on brokerage services, which I think we by and large have, but to add depth in key markets around the country, and although these acquisitions are not huge from a capital commitment point of view, they are adding strategic importance to the Henry Schein value-added service offering such that we can now help put a practitioner into practice and, when the practitioner's ready to sell the practice, help the practitioner exit.

Overall on the dental side, we are comfortable, more than comfortable.

We're actually quite happy with the progress we've made.

We have an outstanding management team across the board.

We've added to that, we have added young people to the team as well, and we believe that we are on a solid footing to execute on our major strategies there, ranging from advancing our specialty business to our practice management software business and, of course, most importantly, to advancing the digitalization of prosthetics on a global basis.

So, overall happy with the animal health -- with the dental business.

Now let me turn to the animal health business for a few minutes, where sales growth in the fourth quarter featured double-digit gains in local currencies in North America and international.

With international, internal sales growth in local currency is at a multiyear high.

Internationally, we saw particular strength in the UK as well as Australia, the Netherlands, and Belgium.

We recently expanded our animal health equipment capabilities with additional capabilities and capacities and particularly through the recent announced acquisition of scil animal care.

Scil will bring to Henry Schein a new value-added services offering, while deepening our relationship with veterinary practices in the technical -- from a technical point of view in the equipment area specifically and, of course, the software area, too, building on our installed base of practice management software, which we believe is the largest installed base of its kind.

These scil animal health professionals will enhance the equipment sales and support capabilities of our animal health business, representing our key supplier partners and introducing veterinarians to important diagnostic options.

We believe strongly that diagnostics are a critical element to help veterinarians provide high-quality care and increase practice revenue.

We furthermore believe this will significantly -- that scil will significantly expand our diagnostic products category.

Not only do we have a very good offering of diagnostic equipment, but it's the value-added services and the connection between the value-added services and our practice management software in the electronic medical records that is so important, and scil will add a very, very important element to connecting the hardware and the software and enable us to gain market share for our animal health diagnostics partners, which of course include, amongst others, Abaxis, Heska, but there are others as well, but these are the cornerstones in our mold.

Of course, the scil software and the related professionals' knowledge will tighten the ability of Abaxis, Heska, and others to work with Henry Schein.

We are pleased with our progress to date in representing the product lines from both of these companies.

Let me remind our investors that we really only added these lines towards the end of the fourth quarter and are now up and running with our suppliers in the diagnostic space.

Scil hasn't closed yet, but will close soon, and once this is done, we will really have very good momentum in the equipment and diagnostics space, as well as the software space.

Scil is based in Germany, sells services and supports laboratories and imaging diagnostic products and services to veterinarians of course in Germany, but in the United States, in Canada, France, Italy, the Netherlands, Spain, with a distribution presence in 25 additional countries.

With scil, we are adding Canada and Italy to the list of countries where Henry Schein Animal Health serves veterinarians.

We also are gaining more than 200 employees, including 32 veterinarians -- I would like to stress this, 32 veterinarians, of course 26 equipment specialists, and more than 70 sales representatives.

Scil had sales for the 12 months ended September 30, 2014, of approximately $70 million.

We do expect this transaction to close in the second quarter of 2015, of course subject to standard regulatory approval, but we don't expect any real concerns over here.

The sales are not usually material from a Henry Schein corporate point of view, but the know-how, knowledge of the scil group, together with the know-how and knowledge of the Henry Schein group not only in the animal health space, but generally in the equipment space, in medical, and of course dental, will put us in an excellent position to advance our sales in this regard.

At the 2015 North America Veterinary Conference in late January, we showcased the choices we offer veterinarians in diagnostics, from software to equipment to business solutions.

We introduced a new software product called Axis-Q, a bio-directional -- important -- bio-directional integrated solution that improves workflow and reduces list patient charges.

Axis-Q operates between the practice management software, such as the important -- such as from the important offering of software that we offer, such as AVImark, Infinity, and Triple Crown, and the clinics' Abaxis and Heska diagnostic equipment.

Axis-Q automates the workflow of diagnostic tests so the clinician does not have to manually input codes and it automatically returns the results to the electronic medical record.

Feedback from the show was very positive.

We worked on the system rather rapidly, and you can expect a lot more features and functions to be unfolded in the near future.

We are committed to the practice management arena in animal health, as in dental.

Software, electronic medical records, accounting systems are the cornerstone, but what differentiates Henry Schein in the dental space, the physician space is the ability to offer a complete integrated system integrating key machinery, diagnostic, other equipment in the office and software in the office to our software.

We will now further advance this in the animal health space as well.

We expect to formally launch Axis-Q in the second quarter of 2015.

Let me now turn to the medical group.

Medical sales growth accelerated in the fourth quarter, compared with the third, and was at a multi-year high as we made continued progress with large group practices and IDNs, the integrated delivery networks.

This progress will be significantly enhanced under our strategic agreement with Cardinal Health.

The agreement is designed to provide one of the most comprehensive service and product offerings to office-based medical practitioners.

As we announced in late November, the agreement combines Cardinal Health's product line and extensive touch points across the healthcare system with our outstanding service capabilities and our history of servicing the office-based practice.

When we talk about the office-based practice, we are not talking only of the independents or the large group practices, but we are talking about the practices owned by IDNs, we have shown a track record now of being in a position to deliver outstanding service.

Together with Cardinal, we believe we will deliver to our integrated network customers, the IDN customers, and individual physicians, small practices and multispecialty, solo specialty practices vastly improved efficiency, a wider breadth of product, world-class service, and a value for the ultimate benefit of the patient.

In essence, there are three components of this new agreement.

First, we acquired Cardinal's physician office focused commercial organization and will integrate it into Henry Schein's medical business.

This will add more than 25,000 physician office locations and more than $300 million in revenue to our medical business and will be slightly accretive to 2015 earnings.

Of course, the second component includes a multi-year supply agreement where Henry Schein will purchase Cardinal branded products and utilize Cardinal Health as a source for various other medical products.

We view this as a real win-win relationship, as we expect to have lower or comparable pricing on a wide range of products and, of course, Cardinal will also benefit from increasing their sales into this sector through our focused approach.

Then there is a third component of the agreement.

We are excited about providing a unique combined solution to integrated delivery networks.

The timing is ideal as IDNs seek to improve the coordination of care, increase efficiency, and drive consistently in standardization across their networks.

Of note, more than a half of the US physician practices interact with an IDN and that percentage, of course, continues to increase.

The cooperation to date between Henry Schein and Cardinal Health has been excellent and the teams are really off to a great start.

We are working to transition customers and the sales team and expect to complete the integration of this business towards the end of the second quarter.

At that time, we look forward to welcoming more than 200 Cardinal Health employees to Team Schein.

We will keep you apprised, of course, of the progress of this strategic alliance on future calls.

I think you get a sense for how much progress we have made in our three verticals -- dental, medical, animal health.

This progress was really all charted out in our strategic plan, the last few strategic plans, but I believe we made terrific progress in the 2012 to 2014 plan along -- to advance the needs and the market share and the profitability of these three global verticals.

As investors are aware, we have a horizontal as well and that's in the technology and value-added services arena, where we are also delighted to report that our internal international technology and value-added services sales growth in local currencies grew by double digits for the eighth consecutive quarter.

The growth rate more than doubled when including the impact of strategic acquisitions.

Of course, this is a business that has some good sales, but, more importantly, good profits.

But what is more important here is the stickiness and the value-added service that we provide to our customers such that it keeps our customers bound to us when they view us versus our competition and the options are driven -- the answers to the options are driven towards us as people understand, as our customers understand, our value-added services and specifically around the technology and value-added services group.

We believe that equipment financing, as well as lower software sales in North America, were both negatively impacted by the late reinstatement of tax incentives in the US.

Having said that, our reoccurring revenue continues to grow and this is a great, great business for us.

Before taking questions, Steven and I, I'd like to reflect back a moment on a few highlights of the year from an overall point of view.

We are extremely pleased to have met and even exceeded many significant goals, while advancing our strategic plan.

We reported diluted earnings per share for the year of $5.44, which exceeded the top of our EPS guidance range established in November of 2013 by $0.05 per diluted share.

We achieved operating cash flow of close to $600 million and free cash flow of over $500 million, both well in excess of net income.

So, it is not only good enough to have good earnings per share on an accrual basis, but it is important to turn that accrual-based earnings into cash flow, which we have done now for several years.

We also repurchased about $300 million of stock, which is aligned with our stated annual goal, and we also entered three new geographies during this period, three critical markets, Japan, Brazil and Poland.

That was on the heels of entering the South African market just before the beginning of the year.

We became a significant participant in the US equine market via an acquisition and enhanced our domestic group via the strategic transaction with Cardinal, as we discussed.

We strengthened our corporate governance with two appointments of outstanding Board of Directors members.

Dr. Dianne Rekow, the Dean of King's College and formerly of NYU, is a materials expert and an orthodontic expert, and Dr. Larry Bacow, former president of Tufts University, who also serves on several other boards, and these are just simply outstanding directors.

Our commitment to advance in technology and, of course, the digital dental office was evidenced by opening our new headquarters for our domestic dental practice solutions business and hosting the first international symposium on dental -- on digital dentistry.

We are, of course, undertaking similar activities in Europe, invested in a terrific new facility in the UK with similar kinds of capabilities to the one we now have in Utah.

Lastly, we received a number of awards and recognitions, including being named to Fortune Magazine's list of World's Most Admired Companies, being named among the year's most ethical companies by Ethisphere Institute, and climbing a few notches of the Fortune 500 list of America's largest companies.

During the last quarter call, I discussed some of the key pillars of our 2015 to 2017 strategic plan.

These most recent accomplishments from 2014 were an excellent foundation for us to go into the 2015 plans.

We have our priorities lined up, as we always do.

We will focus on them, but we will remain nimble enough to take advantage of additional opportunities that come our way.

But we -- as we have been for years, actually the foundation of the Company's and our history is to be a very focused company.

We know what we have to do over the next three years, particularly as it relates to new product categories; more product exclusives; new geographies; enhanced margins, of course, very important; new clients; specialty customers; new technology solutions; and above all in 2015, it's about human capital, talent, investment, management, and you can be sure that Team Schein is focused on this great succession at all levels of the Company.

With that overview of our quarterly financial and operating performance and a summary of the year, I would like to thank you for your attention this morning.

For those that are investors, thank you for your confidence, and we are open for questions.

Natalya, we'd like to start taking questions, please.

(Operator Instructions) Bob Jones, Goldman Sachs.

Great, thanks for the questions.

I guess if there was a soft spot in the quarter, you guys called out dental equipment, and I understand you believe that a lot of that was from Section 179 and the timing there.

Any sense you could give us on what you would have expected to see in equipment had it not been for that change in timing?

And then, maybe more helpful even than that, could you maybe just talk about what you are seeing in your equipment backlog as we move into your 2015?

Sure, Bob.

On the first part of your question, I don't know if I want to give a specific number because it's really difficult to quantify what customers would have bought because of tax incentives that ultimately didn't buy, but we certainly believe we would have had good growth.

If I peel the onion on the equipment categories in North America, I think it's important to note that our CAD/CAM sales growth was strong.

Traditional equipment was down a little bit, but not as much as the overall category, and really I think people on some of the discretionary digital solutions, that's really where we saw people hold back.

In my opinion, a lot of that really is timing, that people would have accelerated their purchases in Q4.

They will ultimately buy sometime in 2015, not necessarily in Q1, but sometime in 2015.

Right now, the tax incentives, the way the US government did it, they reinstated them December 19, but they re-expired on January 1, 2015, so no one knows whether they will reinstate them again and at what time, but right now the tax incentives are only at the $25,000 level.

The second part of your question really -- again, I gave color on the components.

I'm not sure there's a lot more to add there, other than, again, we feel like with the addition of additional equipment lines, including A-dec, we feel like we're going to have a good equipment year in 2015, and I think most people realize that the consumable sales growth, which was strong, just under 5%, really is a better indicator of how the market is doing than this one quarter of equipment sales.

That's very helpful, Steve.

I guess just switching gears to medical, I believe the guidance that you are reaffirming today was actually given prior to the Cardinal announcement, so as we think about the ramp of the expected synergies and savings from that arrangement, which I know -- I think is expected to close in 2Q, anything you can add just as part of how we should think about how additive that deal could be in your 2015?

Yes, so we did say at the time of the announcement it was slightly accretive.

That is somewhere -- a couple pennies or so of accretion for 2015.

Remember, that is net of all integration costs and one-time costs, so -- and we're not expecting to complete the integration until Q2.

Really in Q1, there is really mostly expenses and not a lot of benefit.

It is slightly accretive, but we do expect increased accretion, and really we're being very conservative on the potential for the procurement and buying at better prices because we really don't know the impact of that yet, so that could be an additional upside on certain products.

Obviously, we would think that Cardinal Health buys at better prices than we could do on our own, especially on the pharma side.

Hopefully, that will be benefit, but it's too early really to quantify what that benefit will be.

Okay, got it.

Thanks so much.

Glen Santangelo, Credit Suisse.

Thanks for taking the question.

Steve, I just wanted to follow up on the medical segment.

You obviously reported some decent organic growth in there, but could you maybe talk about the Cardinal revenues that you booked?

You booked them on an agency basis.

How should we think about that transition and when you'll book them as regular revenues?

And were there any incremental revenues that augmented that internal number or did that fall at acquisition?

How do I think about all that?

Okay, yes, Glen, good question.

Because right now Cardinal is continuing to service customers, they are taking orders, they are shipping, they're billing, they're collecting, they are really doing all of the functions until integration, US GAAP doesn't allow us to record that revenue gross with all of the expenses.

So we get a fee based on sales from Cardinal, which is designed to represent the estimated profitability of those sales that they are collecting on our behalf.

And that number is what we included in the acquisition growth, so the organic growth does not include any impact from the Cardinal agency fee that we are receiving.

Once integrated, so sometime during Q2 is the plan, we will shift over to having those sales fulfilled through our distribution network and we will be taking the orders and doing all of the traditional distribution work, and at that time we will record the gross revenues, again which should be north of $300 million on a full-year basis going forward.

All right, that's helpful.

Stan, maybe if I can just follow up with you on what you are seeing on the M&A landscape.

Essentially, there was a pretty interesting animal health deal announced in the sector with one of your, obviously, closest competitors being acquired here recently.

Your closest dental competitor has made inroads across the pond on the animal health side as well.

Are you starting to see any changes in the competitive landscape as some of these other companies maybe start to look more globally from a competitive perspective, any rise in prices or anything we should be aware of?

No, I don't think our competitors' changes in ownership or expansion abroad will impact much.

Our pipeline on acquisitions is as full as ever.

I wish we could close all the deals in the pipeline.

It's not a matter of capital; it's a matter of capacity because integrations are something that goes along with every acquisition.

So we don't have an issue finding acquisitions.

I think we will have no issue in putting the capital to work that we've got outlined.

I think something like somewhere between 45% and 50% of our cash flow will go into acquisitions.

We will continue with our formula of accretive acquisitions.

In fact, I think we are on a better position today to make acquisitions than ever before.

Our track record is outstanding for keeping management where we make commitments upfront.

Our suppliers are generally supportive of us because they've seen us enter markets and not disrupt markets, but in fact add to the distribution capability and the value-added services in a market, which generally gets better after we enter, from a competitive landscape point of view.

I don't think there is any issue from that point of view.

We have no problem in keeping the pipeline full.

We will expand our geographic presence in our dental, in our animal health business.

We will probably do that in medical again at some point, but we want to get the Cardinal integration behind us.

That's a big opportunity.

We have the right to sell the Cardinal products abroad and we will do that.

And I think you'll see us adding much more in the value-added service area.

It continues to be important to us, across the board in all countries.

Of course, the specialty area, there's lots and lots of opportunity.

Meanwhile, we have become an important player in the specialty-only products.

We are always an important player in selling general products, equipment consumables to specialists, but it was the specialty products, the implants and the bone regeneration, the wires and brackets and related products and the endodontic type specific products, we are doing well growing that throughout the world, inorganically and, of course, organically.

So I don't think we will have any issue in continuing to expand and I don't think we will be paying a penny more than we used to pay.

We have a very good reputation in this area and are very good at integrating businesses once we acquire them.

Okay, thanks for the details.

John Kreger, William Blair.

Stan, towards the end of your remarks, you listed off some of the newer countries that you've entered in recent years.

Can you just expand a little bit upon how that portfolio of countries are doing?

Are they generating higher levels of growth than your more mature markets?

How does the profitability in that portfolio compare to your more mature markets?

And should we expect more of these type of entries as we move through 2015?

Yes, first of all, that's a very good question, John.

It's something that's very important for us.

It is clear that Asia and the developing world are growing at a much faster rate than the developed world and certainly faster than Europe.

And that there is a big market.

There is at least a third of the world's dental business that is available in these developing world markets/Asia, and of course, Japan is not a developing -- or Korea is not a developing world country.

So we continue to expect to increase our presence.

Having said that, at the moment it's relatively small, and the entry into the Japanese market, for example, is not a consolidated entry acquisition, nor is the one in Brazil, nor is the one in South Africa.

We are doing well in all of these businesses, but they are not material.

China, we are not material, we are growing, but it is not profitable.

The others are all profitable.

Thailand is profitable, although there was an issue for a couple of quarters because of the coup, but I think it's quite balanced today.

We think we're going to have -- at least from an economic point of view, things are looking better.

Overall, I think these markets are all markets that are growing faster, even if you take into account some of the losses in China where we have a team much bigger than we need, a much more sophisticated team, an outstanding team, actually.

We believe we have the best professional team in China of anyone, really, in our space.

Overall, I think you'll see that from a profitability point of view, it's pretty good.

We are particularly pleased, by the way, with Brazil where our growth is really fantastic, and South Africa, too.

So I would say that these are opportunities that are doing very well for us, except for China, which is growing nicely on the topline, but is at this stage still requiring quite a bit of an investment.

Great, thank you.

Then a similar question on your dental chain business.

How is that going versus dental overall, and should we view that as being additive to margins over time or maybe a little bit below the average?

First of all, our corporate accounts business not only in this country, in the US, but throughout the world is growing and it's gaining a greater market share of our total business, number one.

Number two, it's not dilutive to our general gross profit because there is -- this is incremental business.

We don't need to print new catalogs.

We have a different compensation structure for our team.

It's quite complex because with the very large accounts, we don't really pay commission.

It's a customer service type bonus.

But then for the middle-market customers, we do have compensation, but it is modified.

So overall, this is -- it's profitable business.

These customers are working with us to advance their purchases with specific manufacturers that are interested in the sector and supporting us, so overall this is not dilutive to our gross margin -- operating margin, sorry, to operating margin, sorry.

Thank you, Steven.

But I wouldn't want to go beyond that for competitive reasons.

But this is good business for us and we have a real good market share.

Great, thanks very much.

Jeff Johnson, Robert Baird.

I wanted to start maybe on the A-dec news from a few weeks ago.

Steve or Stanley, how do we think about that as far as the incremental impact this year?

We have talked in a couple of our notes about some low-hanging fruit we believe you will be able to capitalize on in the near term here once that contract goes live, but the basic equipment market growth as a whole market probably doesn't change a whole lot.

Do you lose a little bit somewhere else or do you take share this year because of A-dec?

How should we just think about the pie versus your part of that pie this year with A-dec in there?

Yes, Jeff, it's a very good question.

The goal here, obviously, is to try to expand the market a bit, which I think we can because we have customers that have older units of A-dec chairs.

They'd like to replace them.

They won't replace them necessarily with another brand, so that's a good place to start.

But our goal is not to be disruptive in the marketplace because we are in this for the long haul.

There are certain customers that the A-dec line naturally fits in with and there are customers that are happy with the products we have been offering.

Our goal is to expand the A-dec business together with ours, but at the same time not in any way distract from our loyal suppliers over the years.

So we will go carefully.

I think A-dec is aware of this and we hope to add to the marketplace in general.

The A-dec chairs are slightly more expensive than chairs that we have been offering to date.

Overall, we think we have an outstanding offering.

A-dec adds to that, but we also believe that the offering we have from our existing suppliers is a good one.

It's been an outstanding one.

It's allowed us to become a very significant player in the equipment business.

In fact, we believe we are the largest provider of equipment in the world, dental equipment.

So we just have to be careful not to disrupt the market and make sure that we are additive, and I think that over time we will do well for A-dec, as well as for our existing suppliers and more importantly for our customers and our sales team.

Great, that's helpful.

Thank you, Stanley.

Then, Steve, just as my follow-up, the A-dec is maybe slightly -- the A-dec deal may be slightly accretive this year or additive this year.

Cardinal, obviously.

But what I haven't heard is how much currency since you last provided guidance (technical difficulty) maybe how much do you think currency is going to take from the year relative to the last time you provided guidance or the first time you provided guidance back last quarter, and even on a year-over-year basis, if you could give us the total impact you'd expect from currency?

Sure, Jeff.

When we issued guidance -- and I will just focus on the dollar to the euro because that's our major currency, although -- now there is a little bit of impact on some of the other currencies, too.

But the euro to the dollar was $1.24 when we issued guidance.

Right now, as of yesterday or today, it's probably $1.13.

Assuming that the $1.13 stays for the entire year, which I'm not sure is a good or bad assumption, but we have to start with an assumption, that would have anywhere -- versus our previous guidance -- anywhere between an $0.08 to $0.10 EPS impact.

That's why on the conference call we said while we're still comfortable with our range, we're really at this point saying the lower end of the range.

Yes, there are a few offsets.

Cardinal is a little bit of an offset to it.

Actually, fuel prices are a little bit of an offset to it, also, but not significant.

And again, we don't know which way fuel prices are going to go over the next eight or nine months.

But I think we still feel like achieving our full-year guidance is very doable, and obviously if the dollar continues to strengthen, we will look to see if we can continue to achieve the guidance by doing some other activities, or not.

But again, it's so hard to predict and I really don't want to predict what I think the full-year impact will be, because I think it's too difficult and there are too many variables.

Understood.

Thanks, guys.

(multiple speakers) I think Steven's view is quite correct.

It's much too early in the year to change guidance, and we have to remember that on the one side, our earnings don't translate any (technical difficulty) US dollars and European earnings just before.

On the other hand, we are hopeful that because of a low euro, we will see a stimulation of the economies in Europe.

It's not going to happen right away, but I think my sense is, having spent some time in Europe now in the last couple of weeks, last month or so, that we will see some recovery in some of the markets in Europe from an export point of view, which then in the end trickles into some of our business.

So I think -- and at the same time, if the euro stays low, our imports of products go down in price, not only in terms of products from Europe, but also from Asia.

So it's much too early and I think Steven is correct to signal the lower end, but there are so many variables that could move in a positive direction as well.

But it's much too early to go much further than that.

Understood, thank you.

Jon Block, Stifel.

Great, thanks.

Good morning.

I have got one dental and one vet.

Maybe I will start with vet.

The North American vet internal number was certainly solid, but it was a slight step down from the 3Q levels and we are hearing the market -- overall market remains pretty strong.

So was that North American number hit a little bit as you terminated the IDEXX deal before year-end?

And then, can you also comment on your experience in the early days trying to convert IDEXX accounts to either Abaxis or Heska?

Then I have got the follow-up on dental.

Thanks.

I don't know exactly the impact.

I'm sure Steve would be happy to get back to you of IDEXX on our fourth-quarter 2014 versus 2013.

But clearly it was a distraction, as it was to others in the marketplace.

I don't know whether this quarter is indicative of the trends or not, but I will tell you that our animal health business is solid.

We will do well in the diagnostic field.

I am quite convinced about that.

We have had this type of issue so many times in our history and we have always come out in the end quite strong.

In fact, it's a welcome wake-up call because I think you will see us investing much heavier in our software businesses, and so we will move towards this bidirectional integration that improves the quality of our systems, the use of the systems, shall we say, and I think overall in the end Henry Schein will be a better investment for our shareholders from this point of view.

I will say that also, then, I think you have seen this from others who have reported traffic into the animal health space as okay.

It is a great market.

We are seeing lots of capital coming into this market and we remain very bullish.

We have invested heavily from a management point of view in Europe, in Australia/New Zealand.

Our CEO of our animal health business in the US retired.

He is still a consultant to the Company.

We've replaced Kevin with an outstanding new president, who's presiding over an outstanding team.

So we remain extremely excited about the third leg to Henry Schein that we added really about four or five years ago in a material way.

It's a great investment, and you'll see us making more investments not only on expanding our distribution, but in value-added services and in advancing unique products in this area.

A great market and I think we should have -- it is hard to give you precise numbers, but we should have a very good 2015 in the animal health space.

Okay.

Then the dental is two parts.

Stanley, the first one is for you.

About a year ago, I think it was around then, you laid out what looked like some aggressive goals to move from one out of every three new North American CAD/CAM users to one out of every two.

How are you tracking against that now nine or 12 months later?

And then, Steven, to an earlier question, I just want to make sure I'm thinking about this correctly.

If I estimate about a $40 million shortfall in North American dental equipment because of the 179 delay, we should view that largely as a pickup from 4Q 2014 to 4Q 2015 as those accounts await the reimplementation of 179, rather than trickling in throughout 2015?

Thanks, guys, for your time.

It's hard to give you in one quarter whether we are at 50% or a third of the new systems.

What I can tell you is that we are continuing to do well in CAD/CAM in the US, in Canada, in other markets where we have E4D, and in the markets where we have CEREC, we are doing well.

In our global category for CAD/CAM, the hardware, the entry devices, the materials is doing well and is growing.

We have a team in place that's been in place for four years now and really are doing very, very well.

I think this category is probably, at least from the big categories, the fastest-growing category.

I believe that overall we are doing quite well, but -- in fact, we are gaining market share globally.

But to give you a precise number of new units sold in the fourth quarter versus what our competitors sold, our competitors (inaudible) several units today.

It's very hard to tell.

We will track that in a much more -- a much longer period of time.

I will pick up on the second part of your question, Jon, but I will add to Stanley's first part.

Q4, I think when you look at how much market share we grew on CAD/CAM, because of the reduced sales with tax incentives, I don't know if it's really indicative.

But while saying that, we still had something in the high teens sales growth in CAD/CAM in North America.

So we still had very strong growth.

It probably would've been a lot stronger if the tax incentives were available, but they just weren't.

With respect to the second part of your question, if nothing changes from where we are, we will have a normal year, I believe, for equipment.

Because we did not get pull forward in 2014 -- in Q4 2014 from 2015, and if nothing changes, the tax incentives aren't increased, we probably won't get much pull forward at the end of 2015 pulling forward from 2016, so it would be a normal year, which would be good, I think.

We are still hopeful.

I think there is still possibilities that the tax incentives could be reinstated at some point, but right now we have to go with whatever the tax law is that exists, and it's only for the first $25,000 of capital expenditures, which is a relatively small amount.

As you know, CAD/CAM is over $100,000.

A lot of other equipment is expensive, so without that tax incentive, it doesn't give people the incentive to buy now and they will still buy, but they will buy in due course, rather than trying to accelerate it.

Hopefully that answers your question.

It does.

Thanks for your time, guys.

Thank you all for your interest.

The questions actually were, as usual, very good.

If you have additional questions, please feel free to call Steven Paladino or Carolynne Borders at 631-843-5500 and the operator will put you through.

As we finish off the reporting for 2014 and go into 2015, we are extremely excited as a Company.

There is so much going on and we just have an outstanding team.

Our brand is doing well in the marketplace and we are excited to be implementing our strategies for the -- in connection with 2015-2017 strat plan.

I think it's well thought out.

The team is galvanized behind it and we are excited going forward.

Thank you for calling in and I guess we speak to you in 60 days' time.

Thank you.

This concludes today's Henry Schein fourth-quarter conference call.

Thank you for your participation.

You may now disconnect.